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Rethinking globalization

Posted By ISRAEL21c Staff On July 17, 2005 @ 12:00 am In | 1 Comment

Don’t build high walls around Israel and resign from the world trading system.Ordinary people tend to see globalization – creation of world markets in goods, services, labor, capital and technology – as threatening. They see the jobs lost to cheap labor in India, China and Malaysia, they see Israel’s textile industry disappear, they see the flood of cheap imports hurt local businesses, they see even R&D jobs migrate from Haifa to India – and they are afraid.

Economists tell these people, you just don’t understand. Yes, some good jobs may be lost here. Yes, 25,000 Israeli textile workers are out of work forever. But in the end Israel’s GDP has to be higher in the long run through globalization, because of the law of comparative advantage. When countries specialize and trade with one another, everyone gains. China gains. So does Israel. Always remember to include the gains by consumers from buying products that are better and cheaper because of globalization.

The economists say, the gains of the winners from free trade always exceed the losses of the losers. We have known this for two centuries, since David Ricardo. Every basic economics course teaches this. Remember – cloth and wine?

Are the economists right? Or are the people?

Perhaps the world’s greatest living economist is MIT Professor Paul Samuelson, a Nobel Laureate, who at 89 years of age is still vigorous, active and hard-working. Many generations of students studied economics using Samuelson’s best-selling textbook.

In a recent academic article, Samuelson rethinks globalization.(1) In it, he deals “weighty blows against economists’ complacencies about globalization”. He shows that America may in fact lose, not gain, from globalization. His basic argument: consumer gains are offset by income losses. If globalization causes enough Americans to suffer lower wages, America as a whole loses. Since his argument applies to Israel as well, we should pay careful attention to what Samuelson is saying.

Suppose, says Samuelson, China or India progresses by excelling in a product in which the U.S. previously had a comparative advantage. Take, for instance, an intelligent high school graduate in South Dakota, who works at a call center for a credit card company and earns one and one half times the U.S. minimum wage. This person, Samuelson says, answers my queries about my credit card.

Now, suppose a Bombay, India, outsourcing unit takes over this call center. Their wages are far less than those of the South Dakota high school graduate. Their productivity is equal. So the American worker is fired. So are all the other workers who work in call centers. And there are a lot of them. Some 57 million white collar professionals, in fact. The shift of comparative advantage in white collar professional services from America to China and India causes a permanent long-run drop in American per capita income. And, in theory, America becomes a net loser from globalization.

Apparently, this is not just theory. It is happening. And it may be happening in Israel as well.

All of this could have been predicted, Samuelson says. American workers used to have a kind of monopoly access to superlative capital and know-how; we Yankees were born with silver spoons in our mouths, he says. However, US know-how and capital spread faster away from the US Foreign educable masses put competitive pressure on US lower middle class wage earnings. Once, this happened because of mass migration of poor workers to rich countries.

Today, it happens because of globalization – the ability to outsource virtually anything, anywhere, anytime. Foreign workers no longer need to migrate. Nor does it help to keep them out. Their output travels abroad by ship, plane, phone, satellite, Internet. So the workers themselves need not move to compete with Americans. This could have been predicted in 1950. And, says Samuelson, it will only grow in the 2005-2050 period.

What if globalization does hurt America, or Israel, and what if the losers lose more than the winners gain? What should be done?

The answer, of course, is not to build high walls around Israel and resign from the world trading system. The answer, instead, is to understand how and why the big winners from globalization – the Asian nations – are gaining, and to learn from them, just as, in the past, they learned from us. This is a major reason why we at TIM will bring a group of Israeli managers to China this month, on a benchmarking trip, as a key part of their management program.

American innovations spread abroad, notes Samuelson, and slashed America’s lead. Perhaps it is time for Asia’s innovations – their energy, hard work, eagerness to learn, focus on high-quality engineering education – to spread to the West. Perhaps it is time for us in Israel, and the West, to wake up.

(Reprinted with permission from The Jerusalem Report)

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